Islamic finance – View from the investor
While the Sharia funds sector is growing at pace, there are areas in need of competence and abandoning the assumption that it will sell based purely on itself, while also developing products that are competitive in the broader market.
“Just because it’s a Sharia Fund, the assumption is that it will sell.”
- Bhaskar Dasgupta, Chairman of the Board & Non-Executive Director Apex UAE, Bahrain & India Boards
The Sharia/Islamic funds sector is growing rapidly with a 300% increase in assets under management (“AUMs”) over the last decade based on data from the General Council for Islamic Banks and Financial Institutions in Bahrain which has resulted in an AUM of $200 billion (Reuters, 2022). There is a steady demand coming from investors wanting to have exposure to these funds.
That said, there are some details of the market which still need to be qualified. Sometimes the fact that it is Sharia itself leads to what we call infantilism of the market. Just because it’s a Sharia Fund, the assumption is that it will sell. As if that label is enough. It is a severely unidimensional view assuming that all investors, whether retail, mass affluent, high-net-worth individual, or institutional level will simply choose funds since it’s Sharia.
We have yet to come across effective treatment in the professional or academic press where the investment allocation decisions, frameworks, and appetite of Sharia Fund investors have been explored properly.
A recent paper by John Sandwick and Pablo Collazo published by the Journal of Asset Management in 2021, tries to undertake a bit of a review on this matter by evaluating modern portfolio theory with Sharia. Some interesting takeaways include:
- There is no drop in performance by investing in Sharia fund products.
- Due to the prohibitions of Sharia, the investible universe for Muslims is therefore different from other investors.
- Normally Sharia investors will invest in four major asset classes: money market funds (Murabaha), fixed income in the form of sukuk’s/ bonds, equities based on the MSCI or Dow Jones Sharia Equity Indices, and then finally alternative asset classes where real estate investment trusts and exchange-traded commodities roam.
- The result of these filtering, and sorting processes is nearly 60 securities with just under $15 billion AUM, relatively well distributed among the four classic asset categories.
- The market is quite narrow once you start slicing the population by minimum ticket sizes, geographies, sectors, etc.
Given these findings and what we have seen in the asset management industry across multiple funds and several billion dollars of AUM, the market still needs to mature, and the starting point is to stop infantilising the customer. The asset management sector needs to develop products which are competitive with the broader market. The demand and returns are there, so that’s not an issue. Given the macro-economics of the international economy – the focus on real assets is even better from an investor perspective.
Are there Islamic asset management firms offering a holistic Islamic asset management service across all asset classes, sectors, and segments? Not that we have seen. There is only a tiny proportion of Islamic Sharia-based fund managers, with a track record, in other markets. One way for Islamic asset managers to see how to develop their industry will be to look at how the environmental, social, and governance (“ESG”) asset management structure has grown over the past few years – they do share quite a lot of similarities on a conceptual basis. Using low-cost fund platforms, and outsourced services with launches of multiple Sharia funds (smaller) to build up a full suite of funds for the Sharia Investor is one way forward.
To find out more, please contact the team.
Reuters (2022) Global Islamic funds market grows 300% in decade – report.
Sandwick, J.A and Collazzo, P (2021) Modern portfolio theory with sharia: a comparative analysis. Available at: https://doi.org/10.1057/s41260-020-00187-w